Welcome to our April edition of Legalseas where we once again review a series of topical issues for the shipping industry.
In this April edition we have five articles which show the breadth of our shipping practice, covering the more unusual (but vitally important) shipping disciplines of taxation and employment law alongside more mainstream maritime matters.
The first article co-written by shipping dispute resolution partner, Philip Roche, and associate, Peter Glover, addresses the legal aspects of the thorny issue of employing armed guards on board vessels. In circumstances where the number of vessels being attacked by pirates is increasing exponentially, ransom payments are rising and there are considerable numbers of high value mega yachts being ordered by persons who are likely to be very keen to avail themselves of additional security arrangements, this is clearly a relevant topic.
You can also view a video of Peter Glover presenting this article.
On a related subject, our second article, written by shipping dispute resolution associate Peter Glover, reviews the implications of the Court of Appeal's recent judgment affirming the High Court's decision in Masefield AG v Amlin Corporate Member Ltd, The Bunga Melati Dua. Regular readers of Legalseas will recall that the High Court's landmark judgment in this case approved the shipping industry expectation that ransom payments were legal. To review our May 2010 article covering the High Court judgment in this case, please use this hyperlink.
Our third article, written by tax partner Angela Savin, looks into the "do's and don'ts" relating to tax investigations (including "dawn raids") in the United Kingdom launched by Her Majesty's Revenue and Customs (HMRC). This article, which provides practical guidance in terms of a tax payer's duty to co-operate with tax investigations, including safeguarding, and providing to HMRC, relevant documents is the first in a series of articles we will include in Legalseas dealing with different legal aspects of tax investigations.
Our fourth article of this April edition relates to the proposed changes to the Race Relations Act 1976 regarding seafarers. Employment partner Paul Griffin and know-how lawyer Claire Darbourne (who have been providing Legalseas readers with regular updates on these changes) outline in this article the European Commission's official views regarding the proposal to remove the exemption against discrimination on grounds of nationality in respect of seafarers pay.
Our final article from Australian shipping and admiralty expert, Ernie van Buuren who practises in Norton Rose Australia's Brisbane office, and senior associate, Claire Bolster deals with the important topic of the availability of "surrogate ship arrest" for maritime claims in Australia in the light of the recent judgment in the Gem of Safaga case. "Surrogate ship arrest" provisions of Australian maritime law which has similarities to the well used admiralty weapon of "associated ship arrest" in South Africa, contains quite restrictive provisions relating to "ownership" of the "surrogate" vessel and parties looking to obtain security for maritime claims in Australia will need to pay particular attention to their due diligence if they are to succeed in achieving and maintaining an arrest.
As always, I hope that you will find our articles to be of interest and we would be delighted if readers could provide any comments on the content, or suggestions for future articles of Legalseas by using the comments box which can be accessed through this hyperlink. Likewise please feel free to pass on the details of colleagues who may wish to receive Legalseas.
As many of you will be aware, Norton Rose Group will be opening in the coming months a new office in Hamburg and we confidently predict that a series of German maritime articles will be forthcoming on Legalseas. For details of the press release relating to our Hamburg office, please use this hyperlink.
Finally, in addition to the articles in this issue of Legalseas, you will be aware that we put out legal updaters on subjects of interest. These can be found on our website and as an example we have recently produced updaters on the Ministry of Justice guidance on the UK Bribery Act and notes on two recent cases relating to timebars and public policy and the payment of ransoms. A link to a recent updater on the legal consequences of the radiation leaks from the Fukushima reactor for the shipping industry is included in this April edition of Legalseas. If you have any difficulty accessing these or any other information or you would like to receive these updaters directly, please contact me directly.
Richard Howley, Partner
Norton Rose LLP, London
Pirates: Enemies of the human race
Certain crimes attract the label of international crimes. Arguably the first such crime to be recognised as such was the ancient scourge of piracy. In international law pirates have long been categorised as hostes humani generis: enemies of the human race. As enemies of the human race the requirement to fight piracy is one of the oldest constructs in international law.
Today the business of piracy is alive, geographically spreading and, despite the high personal risks to those who engage in the crime, profitable. The first successful pirate attack in 2011 took place during the afternoon of 1 January when the Maritime Security Centre-Horn of Africa detected the distress signals from the MV Blida. Since the taking of the MV Blida attacks on merchant ships have been occurring at a rate of more than one per day. In 2010 there were 219 recorded attacks on merchant ships, compared with only 35 in 2005.
The business model for Somali piracy is simple but effective: pirates hijack the targeted ship with a view to extortion. Today ransoms have long surpassed the traditional motive for piracy, that of conventional robbery. The total value of ransoms paid in 2010 amounted to some $238 million, or some $4.5 million per ship released, compared with only $150,000 in 2005. In November 2010 the Samho Dream, captured earlier in April, established a new record for ransom payments when it was released for a reported $9.5 million. With pirates increasingly being able to operate a considerable distance far from their home shores, the risk of attack continues to escalate. Today, Somali pirates alone hold some 33 ships and 758 hostages captive and with some 20 per cent of the world's commercial shipping making the 500 mile passage through the Gulf of Aden, these figures are only likely to escalate.
There is little dissent from the international community as to the solution. Somalia, is widely recognised as a failed State and, and if there is to be a solution, it lies in fixing the lawlessness that has come to dominate the shattered State. But with little international appetite for foreign adventure within Somalia, the immediate solutions must be found on the high seas.
Eradicating piracy is not, however, an easy task. Today there are three main naval task forces operating in the region: Operation Atlanta EU; Operation Ocean Shield NATO and CTF 151 (a wider 25 nation international effort under American command). Whilst the task forces have enjoyed some success, for example the Maersk Alabama, their collective effectiveness decreases as the pirates operate deeper into the Indian Ocean. With finite resources and an area to police the size of western Europe, restrictive rules of engagement, as well as legal complexities, often leave naval forces reluctant to arrest pirates and this is compounded by the difficulties and expense associated with prosecution (arguably followed by a period of western incarceration and an application for political asylum). As a result, if shipowners and their crews are to be safe, private measures must be taken.
By creating designated transit routes, compliance with Best Management Practice Guidelines and passive self defence measures, including the maintenance of a high freeboard and high speed, razor wire, fire hoses, lock downs and alert crews, the risk of an attack can be minimised. Passive measures are not, however, a guarantee against attack. To further safeguard their ships and crews owners are increasingly asking whether they should be deploying armed security teams.
Whilst there has been a traditional reluctance to deploy armed security teams on board merchant ships, such reluctance has, in line with the increasing capacity of pirates to conduct a successful attack, dissipated recently. The deployment of armed guards nonetheless raises distinct legal issues which an owner needs to consider.
Issues with armed guards...
1. Flag State authorisation
The starting point when considering the deployment of armed guards is of necessity the ship's Flag State. Whilst a number of Flag States do not prohibit the employment of armed guards, a number of Flag States do. It is therefore essential that any owner considering the deployment of armed guards consult with their individual Flag State before sanctioning their use onboard.
2. The security provider and the exercise of due diligence
In common with the growth in piracy, the number of companies offering maritime security services has ballooned in recent years. Most employees of the security services are drawn from the ranks of former military services and may or may not have specific maritime experience. Whilst an owner may seek comfort in a particular firm's reputation, the absence of any recognised accreditation service deprives an owner from taking an objective view of the quality of the service being offered. Due diligence is therefore crucial, particularly when the security personnel, pursuant to their contract of engagement, are to be treated as crew for insurance purposes.
3. Who is in charge of the ship
The question is, simply: who authorises the use of force on board the ship? The presence of armed guards on board arguably has a direct bearing on the safe navigation of the ship and the avoidance of dangerous situations. Under SOLAS Regulation 34-1:
The owner, the charterer, the company operating the ship as defined in regulation IX/1, or any other person shall not prevent or restrict the master of the ship from taking or executing any decision which, in the master's professional judgement, is necessary for safety of life at sea and protection of the marine environment.
The force of the Master's authority is repeated in the ISPS code, section 4.10 providing:
At all times the Master of a ship has the ultimate responsibility for the safety and security of the ship. Even at security level 3 a Master may seek clarification or amendment of instructions issued by those responding to a security incident, or threat thereof, if there are reasons to believe that compliance with any instruction may imperil the safety of the ship.
It necessarily follows that any provision in a contract for onboard security services which seeks to displace the Master's authority when force, lethal or otherwise, may be used, or to comply with security directions by the onboard team, should be treated with the utmost caution as to do so restricts the exercise of command of the ship by the master, and may interfere with contractual obligations owed to charterers and cargo interests.
4. Risk of escalation
Arguably one of the greatest risks associated with the presence of armed guards on board a ship is that of provocation and a retaliatory response leading to bloodshed. Whilst there is no guarantee of knowing in advance how any one individual will react under fire, the risk nonetheless highlights the importance of owners conducting proper due diligence, including the vetting of individual security team members where necessary.
5. The use of lethal force
Rules of engagement should be provided by the security service provider and, where possible, endorsed by the Flag State whose laws would otherwise govern the proportionality of any force used to deter a criminal act. In the event a weapon was to be discharged on board during an attack, and a wounding or fatality is sustained, an investigation is likely. Notwithstanding the fact that a ship was under attack, if improper, disproportionate or illegal force was deployed, serious questions and consequences are likely to follow and jurisdictional disputes likely.
In the event someone is killed or seriously injured the contract of engagement may have a "knock for knock" provision whereby, in the absence of negligence, the owner and the contractor agree to save, indemnify and hold harmless the other (and their affiliates) against any claims or liabilities arising in respect of the loss sustained. That is, the loss lies where it falls. In any event, any security provider should be required to hold public liability insurance to cover negligent action on behalf of their personnel.
6. Insurance notification
Whilst strictly not a matter of disclosure for most existing insurance policies, as a matter of good practice the deployment of armed security guards should be discussed with Hull & Machinery and P&I underwriters for any policy implications. Even if the presence of armed guards on board a ship does not of itself void or otherwise affect the validity of a policy, any instruction by a security provider to follow a particular route or sail in an area outside trading limits may operate to void the policy in the event of non-disclosure.
7. Cargo interests
In the event that the cargo was damaged as a result of the deployment of security personnel, it may give rise to a claim by cargo interests that the owner failed to exercise due diligence before and at the beginning of the voyage to make the ship seaworthy.
Normally, the route to be followed is presumed to be the direct geographical route. In the light of the transit lanes in the Somali region, security providers may desire the ship to follow a different route for avoidance purposes or to embark or disembark ammunition and weapons. Any departure from the normal route may amount to a deviation leaving an owner exposed to possible contract of carriage (failure to properly carry cargo), charterparty (unjustified deviation) and P&I (loss of cover) consequences.
The presence of armed guards on board merchant ships has become more accepted with the increase in the sophistication of pirate tactics and the widening of their geographical reach. Whilst the point of acceptance has arguably been reached, and the deployment or armed personnel acknowledged by a number of naval forces, it is nonetheless essential that owners consult with their Flag States, review relevant charters and liaise with their insurance interests when deciding what measures should be adopted.
The issues identified in this briefing are general in nature and specific advice on any particular contract or policy is highly recommended.
Public policy and the payment of ransoms
This article considers the recent decision in Masefield AG v Amlin Corporate Member in which the Court of Appeal was asked to decide (i) if the taking of a vessel and its cargo amounted to an actual total loss; and (ii) if ransom payments by shipowners to pirates were as a matter of English law against public policy. In finding for Owners, the Court held that whilst each capture by pirates needed to be viewed on the facts, capture in itself was not sufficient to trigger an actual total loss. The Court also reaffirmed the decision at first instance that ransom payments to pirates are not against English public policy and therefore legal.
Masefield AG v Amlin Corporate Member  EWCA Civ 24
In February 2010 the Commercial Court gave judgement in the matter of the Bunga Melati Dua, a tanker captured by Somali pirates whilst en route between Malaysia and Rotterdam. Despite having their post capture economically diminished cargo restored to them, Masefield nonetheless claimed an indemnity from their cargo insurers - Amlin. It was the Claimant assured's primary case that on the capture of the vessel by the pirates and its removal into Somali waters the cargo became an Actual Total Loss (ATL) under s 57(1) of the Marine Insurance Act 1906 (MIA) in that the Assured had become irretrievably deprived of the cargo. In the alternative, the Claimant asserted that there had been a Constructive Total Loss (CTL) under s 60(1) of MIA in that the vessel and cargo had been reasonably abandoned on account of its ATL appearing to be unavoidable.
The vessel and its cargo were released some 11 days after capture following the payment of a ransom of $2 million by the vessel's owners. The primary issue for determination was, whether when notice of abandonment was served, the Claimant had been irretrievably deprived of the cargo and thus it had been actually totally lost regardless of the fact that it was restored at a later date following payment of a ransom by the shipowners. At first instance Mr Justice Steel held that no such abandonment had occurred and that to the contrary at the time the notice was served by the Assured the shipowners had every intention of recovering their property and that of the Assured and were fully hopeful of doing so, and accordingly that there was no reasonable basis on the part of the Claimant for regarding an ATL as unavoidable.
This led to the question whether the fact that the pirates were holding the ship to ransom to which the owners succumbed altered this position. The Claimant in this regard advocated that although the payment of a ransom was not illegal it was contrary to public policy. This argument was rejected, the judge holding that Masefield could not argue that the payment of a ransom to secure the cargo be disregarded for the purposes of assessing whether the cargo was a total loss.
On appeal the Claimant continued its argument that (i) capture by pirates created an immediate ATL, whatever the prospects of recovery might be, and (ii) the law would not or could not take into account the payment of a ransom as a relevant and legitimate reason for calculating the possibility of recovery of the cargo. Taking each argument in turn:
Actual total loss
Lord Justice Rix, giving judgment for the Court of Appeal, disagreed, holding that:
...piratical seizure in the circumstances of this case, where there was not only a chance, but a strong likelihood, that payment of a ransom of a comparatively small sum, relative to the value of the vessel and her cargo, would secure recovery of both, was not an actual total loss.
It was further held that it was not an irretrievable deprivation of property, but rather a wait and see situation. Despite the Claimant relying on authority from 1854, and hence pre the MIA, Rix LJ nonetheless held that each case was determined on its facts and as such there is no automatic rule of law that capture or seizure amounted to an ATL. Perhaps with recognition that captured vessels may be used as mother ships, Rix LJ added that piratical seizure may amount to an ATL in circumstances where the pirates escape with their prize for their own use and there is no prospect whatever of finding or recovering the vessel or cargo. However, this was not the case here.
Ransom payments and public policy
As regards public policy, the Claimant's restrictive submission was that the payment of a ransom amounted to a submission to extortion and was so undesirable from the point of view of the public interest and universal principles of morality, that it could be no part of an assured's duty to preserve his property from loss by succumbing to a ransom demand: and that being the case, the property concerned must be considered to have been irretrievably lost, physically and/or legally, where the only means of recovering it was to do something which an assured could not reasonably be expected or required to do.
It necessarily followed that if payment of a ransom could not be required, an underwriter could not assert that the assured had not suffered an ATL. Here the Claimant's counsel placed heavy reliance on s 78(4) of the MIA which provides that it is the duty of an assured to take such measures as may be reasonable for averting or minimising loss. In common with Steel J, the Court of Appeal relied on the decision in Fender v St John-Milway which laid down fundamental guidance as to the circumstances in which public policy could be invoked by a court. In citing the guidance established by the Court in Fender, the Court of Appeal reiterated that, when determining public policy:
...the doctrine should only be invoked in clear cases in which the harm to the public is substantially incontestable, and does not depend upon the idiosyncratic inferences of a few judicial minds.
Rix LJ also noted that Parliament had intervened by way of repeal of the Ransom Act 1782, which in any event only outlawed the payment of a ransom in respect of British ships taken by the King's enemies. Notwithstanding legislative intervention, the Court of Appeal noted, as had Steel J, and by way of reference to the decision in Royal Boskalis Westminster NV v Mountain, that the payment of a ransom can be recovered as a sue and labour expense pursuant to s 78(4) of the MIA. It logically followed that the payment of a ransom could not be against public policy.
The Claimant also submitted that it could not or should not be under a duty of sue and labour to make a ransom payment meaning that capture, which could only be resolved by way of a ransom payment, fulfilled the test of an ATL. This argument was dismissed by the Court. According to Rix LJ:
The fact that there may be no duty to make a ransom payment does not turn a potential total loss which may be averted by the payment of ransom into an actual total loss: any more than the fact that there is no duty to spend an extravagant sum seeking to save a vessel driven onto the rocks means that there is an ATL (as distinct from a potential CTL) if, quite sensibly, the money and effort are not expended on such a forlorn and in every way undesirable venture. In any event, all such questions of reasonableness are pertinent to CTL, but not to the incidence of ATL.
With the scourge of piracy expanding deeper into the Indian Ocean, the Court of Appeal's confirmation that a ransom paid to a pirate is a timely decision and leaves in place one of the few options an owner has to secure the release of his vessel, cargo, and most importantly, his crew, in a safe and timely manner. To this extent the Court's decision can only be welcomed in these morally opaque times.
Peter Glover is an associate and master mariner in the shipping dispute resolution team, Norton Rose LLP, London.
An inspector calls - a practical guide to tax investigations
In the UK, Her Majesty's Revenue and Customs (HMRC) has made no secret of its determination to maximise tax revenue and crack down on tax evasion and avoidance. Companies should therefore be prepared in the event that they become the subject of an HMRC investigation. In the first of a series of articles on tax disputes, we set out a practical guide to tax investigations.
HMRC has the power to investigate both taxpayers and third parties who hold information that may be reasonably required to determine the tax position of a taxpayer; an investigation may therefore relate to a company's own tax position or that of its shareholders, customers or counterparties.
HMRC have powers of investigation under both civil law and criminal law. Under civil law, HMRC has the right to require the production of information or documents, to access computers on which documents were produced, and to enter and inspect business premises. These powers apply to all UK taxes, and to non-UK taxes in certain circumstances. HMRC's criminal powers of investigation are used where fraud or tax evasion is suspected. These powers give HMRC the right to enter premises and require the production of documents, to seize items such as computers, and to arrest persons. We will concentrate on the civil powers of investigation, which usually start by the company receiving a notice from HMRC asking for information. HMRC are able to ask questions relating to UK and non-UK tax, but this will be dealt with in a future edition of Legalseas.
Should a company receive a notice from HMRC, the first step is to check that the notice has been validly issued, to the correct legal entity, under the relevant legislation. There have been instances in which HMRC has inadvertently failed to follow the correct processes so that its actions were not properly authorised.
The notice will set out what information HMRC requires from the company. This may be drafted in very broad terms ("all documents, correspondence, emails, etc in the company's possession or power relating to the company's agreement with X"), which could clearly lead to disclosure of a huge amount of material. If the information request would produce an unwieldy level of disclosure, it would be sensible to discuss with HMRC what they are focusing on to see if the scope of disclosure can be more targeted. At all times, the information has to be reasonably required; HMRC should not go on a general "fishing expedition".
The other significant limitation on a company's obligation to provide HMRC with information is that a company is not required to provide HMRC with information which is protected by legal professional privilege. Broadly, this covers confidential communications between a lawyer and his client in the context of seeking or giving legal advice, and those between a lawyer or client and a third party, which come into existence for the purpose of being used in connection with litigation. Legal privilege will be discussed in greater detail in the next edition of Legalseas.
A company is also only required to produce information if it is in its possession or power. Although possession is straightforward, whether a company has power to obtain possession of a document is not always clear. HMRC argues that if a notice is issued to a UK parent company, it can compel production of any documents held by a non-UK subsidiary or affiliate. However, practitioners argue that based on the House of Lords decision of Lonrho v Shell1 the parent company generally has no "presently enforceable" right to the documents and so they are not in its power. This matter remains the subject of much debate between HMRC and practitioners, especially if the information is confidential as a matter of local law.
Good internal record keeping will make complying with the notice easier. It is important that on receipt of a notice, all relevant information, including electronic documents, are preserved. Companies with a document destruction policy in place (i.e. whereby non-essential documents which are not formally required under the relevant tax legislation are destroyed) should be suspended until the investigation is concluded.
Most inspections by HMRC take place at a time agreed in advance with the company. However, this is not always the case. A raid can significantly damage a company's reputation, and should documents or computers be confiscated, the running of the business may be affected. It is therefore important to be prepared, as little or no warning may be given.
A procedure for dealing with a dawn raid (i.e. one with no warning) should be drawn up, to assist those individuals in the company who will be responsible for the company's response to the raid.
Should the taxman call unannounced, the company's receptionist or security staff should establish the identity of the inspecting officers and the purpose of their visit, and then ask them to wait in a room away from public view whilst the person responsible for managing the response to the raid is contacted. This manager should check the warrant to ensure the investigation is being exercised within the stated time frame and that it relates to all parts of the premises that HMRC officials want to search. Employees should be informed that they must not tamper with documents or obstruct the investigation, that they must co-operate with the officials to enable them to obtain documents - although they should seek legal advice before answering other questions, and, to protect the company's reputation, they should not disclose the fact that the investigation is taking place to anyone inside or outside of the company without permission.
It is important that every detail of the raid is recorded, including every document requested and/or provided, and every question, statement and answer made or given. The manager should also take a copy of any minutes produced by the officials. A debriefing session should be held with the company's lawyer to review any materials requested and/or taken by officials, to review any questions asked, and to consider whether there is any evidence of infringement.
Failing to comply with HMRC investigations may lead to penalties. Under the civil law regime, there are fines of up to £3,000 for failing to comply with HMRC investigations. Under the criminal regime the sanction for obstructing an HMRC officer can be up to 51 weeks imprisonment and/or a fine of up to £5,000. Attempts to destroy or hide any documents or to mislead an officer during a search can amount to the common law offence of perverting the course of justice.
Co-operating with HMRC will be viewed positively. Producing documents within the time period and as specified in the notice should help to ensure that the investigation proceeds as smoothly as possible.
Legal privilege is the second "tax disputes" topic to be covered in the next edition of Legalseas.
Angela Savin is a partner in the tax team, Norton Rose LLP, London.
-  1 WLR 627
Proposed changes to the Race Relations Act 1976 regarding seafarers - an update
We reported in the February 2010 edition of Legalseas the detail of the proposed changes to the Race Relations Act 1976 (RRA) regarding the pay of seafarers. The provisions of the RRA (which have now been replaced by those in the Equality Act 2010) made it unlawful to discriminate against a person on racial grounds in certain areas including employment. However, section 9 RRA contains an exception for seafarers so that they can be discriminated against on grounds of nationality in relation to pay. In March 2007 the Department for Transport issued for consultation proposed changes to the RRA to ensure the United Kingdom's compliance with European Community law on the free movement of workers. Following publication of the consultation, the issue was raised in the context of the Discrimination Law Review and the ensuing publication of the Equality Bill which repealed all existing discrimination legislation including the exception in section 9 RRA. The Bill was silent as to the territorial scope of its employment provisions but empowered the Government to prescribe in supplementary regulations to what extent the new provisions would apply to seafarers.
We then reported in an update in the September 2010 edition of Legalseas that the Equality Bill received Royal Assent on 8 April 2010, becoming the Equality Act 2010 (the Equality Act). No changes were made to the provisions regarding seafarers nor were any supplementary regulations finalised but a government report was published in May 2010 (Review of Stakeholder Evidence on Differential Pay in the Shipping Industry May 2010) which recommended closing the legal loophole which allows differential pay for seafarers on grounds of nationality.
We now report on developments since the publication of our last article.
Commencement of the Equality Act and request from the European Commission
The various provisions of the Equality Act are being brought into force by way of commencement orders. Whilst its provisions as drafted repeal the whole of the RRA, the fourth commencement order under the Act saved certain provisions relating to seafarers, including the section 9 exception, until such time as supplementary regulations are made under section 81 of the Equality Act (which allows the Government to prescribe to what extent the Act's employment provisions will apply to seafarers).
In November 2010, the TUC called on the Government again to remove the section 9 exception and, as reported in a press release issued on 27 January 2011, the European Commission has now requested that the UK removes the exception, which it considers to be in breach of the obligation to treat EU migrant workers in the same way as national workers in relation to employment matters such as pay. In the absence of a satisfactory response within two months, the Commission may decide to refer the UK to the European Court of Justice.
This means that for now the section 9 exception remains in place but we shall of course keep you informed as to whether the Government acts in accordance with the European Commission's request.
Gem of Safaga
The arrest of the Indian registered vessel, Gem of Safaga, highlights the importance of the relevant person test for the purposes of arresting a surrogate vessel in the Australian jurisdiction, that is, who would be liable for the relevant claim in an action commenced in personam?
Euroceanica Uk Ltd (Euroceanica) time chartered two vessels to WAM Singapore Pte, Ltd (WAM), (the Charterparties).
The Charterparties included side letters which stated that:
"...West Asia Maritime... ...India [(West Asia)] shall always be ultimately responsible for the true fulfillment of Charterers' obligations under the [Charterparties]"
Neither WAM nor West Asia paid hire payments under the Charterparties for the period September to December 2009 (the Hire Payments) and Euroceanica arrested at Port Kembla an Indian registered vessel, the Gem of Safaga (the Vessel), which was owned by West Asia and Four M; West Asia owning nine of the 10 shares in the Vessel and Four M owning the remaining share.
The non-payment of the Hire Payments gave Euroceanica a maritime claim pursuant to s.4(3)(f) of the Australian Admiralty Act 1988 (Cth), (the Act), and satisfied the first limb of the two limb test for arresting a surrogate vessel in Australia (the arrest of a surrogate vessel in Australia is similar to, but not as broad and far reaching as, the associated ship arrest provisions in South Africa, for example).
To satisfy the second limb, Euroceanica had to show that:
- West Asia was the charterer, or in possession or control of the two vessels chartered to WAM; (s19(a) of the Act); and
- West Asia was, when the arrest proceedings commenced, the owner of the Vessel (s19(b) of the Act).
The proceedings largely centred around s19(b) of the Act. At first instance, it was held that Four M's share was beneficially owned by West Asia absolutely and Four M held that share on resulting trust for West Asia. Euroceanica therefore satisfied s19(b) of the Act.
This decision was overturned on appeal. The Full Federal Court found that West Asia and Four M were both owners of the Vessel and that the primary Judge had, amongst other things, failed to have proper regard to the legal effect of the ownership documents of the Vessel.
This case confirmed that, where there is more than one owner of a vessel, all the owners must be liable for the claim in which the arrest proceedings are commenced. Therefore arresting parties will need to be very careful in their due diligence as to ownership before seeking to arrest a surrogate vessel in Australia to obtain security for maritime claims. It is also, perhaps, indicative that Australia is not to be regarded as an attractive surrogate arrest jurisdiction in the same way South Africa is so regarded.
Ernest van Buuren is a partner in the dispute resolution team with specialist expertise in shipping and admiralty, and is based in Norton Rose Australia, Brisbane and Claire Bolster is a senior associate in the dispute resolution team, Norton Rose Australia, Sydney.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.